Convergence US GAAP & IFRS, what it means in FA (EBS) Seamus Moran Fusion Financials Development

IFRS & US GAAP: Expectations for end of 2011 & 2012 Converging Standards: Leases & Revenue <Insert Picture Here> The SEC s expected announcement After that: Condorsement? Oracle Solutions: Leases, Revenue, Reporting Impact on Fixed Assets Oracle Credentials Appendix 3

Converging Standards SEC Announcement in March 2010: If the IASB & FASB are making progress on Convergence If the country is ready for IFRS Then, the SEC will make a statement at the end of 2011 On the role of IFRS in US reporting 4

Converging Standards -> 2010 2011-> IASB & FASB focused on Convergence FASB 1. Leasing all lease assets & liabilities on balance sheet 2. Revenue liability to customer for future performance HERZ SEIDMAN 3. Reporting Exposure draft needs to be re-worked IASB 4. Financial Instruments Negotiating with Basel, EU, US, etc. 5. Others normal throughput TWEEDIE HOOGERVORST 5

Leases: All leases are capital Lease Exposure Draft Last Year, 2010 Operating Leases are either Capital Leases or Revenue Arrangements Changes to Valuation Math Input received and considered. Redeliberation not complete by intended June, 2011 many revisions Revised Exposure Draft October or November 2011 Anticipated that it will represent the final standard Final? March or April 2011? all US GAAP & IFRS filers worldwide Effective not before June 2015 for new transactions Probably not before June 2013 for retro-reporting 6

Leases and Fixed Assets Operating Leases Introduced 1959 when airliner manufacturers introduced jets Jets cost much more than propeller airplanes, for huge savings, both in fuel, time spent travelling, and capacity But airlines weren t capitalized to invest in them Bankers created the operating lease to enable the manufacturers to supply the airlines Banks: Bought the airplanes, rented them to the airlines, but did not account for them as FA, as they weren t used in the banks business Airlines: rented the airplanes, did not account for them as FA as only rented Airplanes disappeared from the balance sheet: this what the new principle is fixing 7

Revenue: Performance Obligations Performance Obligations Exposure Draft Last Year, 2010 Recognize a liability to customers for obligations to perform EITF-8 & VSOE lite extended to all industries Input received and considered. Redeliberation not complete by intended June, 2011 many revisions Revised Exposure Draft Winter 2011 (after Leases) Anticipated that it will represent the final standard Final? March to May 2012? all US GAAP & IFRS filers world wide Effective not before June 2015 for new transactions Probably not before June 2013 for retro-reporting 8

SEC s Expected Announcement Role of IFRS in US Reporting Environment Follow Through on March 2010 Announcement SEC Act 32 requires generally accepted accounting principles Converged Standards have been through GAAP review process Other IAS/IFRS standards have been through a GAAP Review process that did include USA institutions (FASB, SEC, others) but was not the FASB s GAAP process Not known what the SEC will announce, but sentiment is: Will probably neither adopt en masse, nor walk away Might say condorsement. Defined in a recent SEC paper Converge & Endorse 9

SEC s Expected Announcement Condorsement? Suggestion: FASB publish each existing older IAS-IFRS Statement as an ASU (Accounting Standard Update) to the US GAAP Codification Each would be reviewed as GAAP; endorsed if equivalent, reworked with IASB if not Generally Accepted Similar to process in some other countries No big bang adoption? Would not apply to Stock Options, Leasing, Revenue Would not be controversial for many IAS-IFRS statements; might be for some 10

Timeline Now Next Year Year After And Again Eventually Oracle OpenWorld 2011 Oracle OpenWorld 2012 Oracle OpenWorld 2013 Oracle OpenWorld 2014 Oracle OpenWorld 2015 This Fall Late Spring 2012 June 2013 June 2015 FASB & IASB publish revised EDs: FASB & IASB publish final Principles: Retro-Reporting on: Effective date of: Leases & Revenue Leases & Revenue Leases & Revenue Leases & Revenue This Winter SEC speech: role of IFRS 2012 FASB Begins Condorsement Process Possibly by 2014 Some Condorsement ASUs Published 2011 2012 2013 2014 2015 11

The following is intended to outline our general product direction. It is intended for information purposes only, and may not be incorporated into any contract. It is not a commitment to deliver any material, code, or functionality, and should not be relied upon in making purchasing decisions. The development, release, and timing of any features or functionality described for Oracle s products remains at the sole discretion of Oracle. 12

Leasing: Product Proposals & Direction Real Equipment Estate All Products: New Valuation Leasing Revenue Landlords Equipment Owners Math as specified in new ED Landlords & Owners: updates to existing products Leasing Expenses Tenants Equipment Users Tenants & Users: Requirements Outline: Reflect new Lease Valuation Rules Handle existing Operating Leases as Capital Leases Capitalize leased real estate & equipment as Fixed Assets Depreciate the Fixed Asset; Expense the finance cost Provide friendly lease portfolio management to help handle volume Lease Portfolio Management Industrial Volume Scaling Enhanced FA to Lease Liability Depreciation & Finance Cost expense All Families: EBS, Peoplesoft, JDE 13

Impact of Lease Accounting on FA Volume: many more real estate and equipment assets Operating Leases Will become Either a capital lease = Fixed Asset & Lease Liability Or a Revenue Arrangement = Fixed Asset & Financing (loan) Or a Rental = Fixed Asset on the Finance Company s Book Examples Renewable 1 year office rental = Real Estate Fixed Asset Two year operating lease on a truck = Vehicle Fixed Asset Computer gear included in a telephone service provision (an embedded operating lease) = Electronic Fixed Asset 14

Impact of Lease Accounting on FA Portfolio management & reporting Creation of an asset when you enter into a lease Similar to existing AP functionality Invoice the asset Pay the invoice with the lease Cross reference assets & leases (stamp lease number on asset and asset number on lease) Portfolio reporting (which assets to which leases) Lease Management (which assets about to expire, etc.) Other asset rules unchanged depreciation, impairment, ARO are all the same. Useful life must have lease duration factored in 15

Revenue: Product Proposals & Direction Customer Facing Existing Product Examples Revenue & Obligation Engine Output & Accounting Order Management Account Receivables Project Management Contracts Pricing CRM Shipping Support Other Products Custom Provide Contract Satisfaction Billing Customer Product & other relevant data Identify elements of arrangements & obligations to customer, categorize as performed or not Value elements of arrangements, performance obligations Value revenue, performance obligation liability Reporting: Transaction & Document Reporting Revenue, Billing & Obligation Reconciliation Accounting: Publish data to accounting engines (eg SLA) Activity and Balances 16

Preparing for Unresolved Proposed Regulation Such as the Convergence projects Oracle monitors the status of the development of the regulation Full time domain staff Membership in professional organizations, et cetera Draft Designs, Design Discussions, Strategy Level Currently: Leases, Revenue Recognition, Reporting, Banking IBU Discuss with Partners and Customers Get the Requirements right Understand customer responses to the proposals Customer Advisory Boards, Strategic Councils More concrete when Final standards issued Final Design when General Acceptance is reached AVAILABILITY Whatever we do will be ready on Current Releases for actual Customer Response and implementation on effective date of the Standard 17

Timeline, Leases and Revenue: the requirement Now Next Year Year After And Again Eventually Oracle OpenWorld 2011 Oracle OpenWorld 2012 Oracle OpenWorld 2013 Oracle OpenWorld 2014 Oracle OpenWorld 2015 This Fall Late Spring 2012 June 2013 June 2015 FASB & IASB publish revised EDs: FASB & IASB publish final Principles: Retro-Reporting on: Effective date of: Leases & Revenue Leases & Revenue Leases & Revenue Leases & Revenue This Winter SEC speech: role of IFRS Retro-Reporting capabilities in time to implement before 2013 deadline 2012 FASB Begins Condorsement Process New Transaction capabilities in time to implement before 2015 deadline Possibly by 2014 Some Condorsement ASUs Published 2011 2012 2013 2014 2015 18

Condorsement? Reporting for Accounting Changes Model the Change Top-Side Reporting Data Capture in Subledgers Take it Home Process Revision Oracle Enterprise Performance Management Oracle ERP Other ERP Custom, Legacy, Competitor Industry Specific Applications Oracle Governance, Risk, & Compliance Suite Allways: Apply Policy and Control Management 19

ERP Products Designed for IFRS IAS/IFRS SUPPORT SINCE 2000 Thousands of customers overseas reporting under IFRS IAS 2 Inventory Inventory, Costing IAS 16 Property, Plant FA, ALM IAS 18 Revenue Rec. OM, AR, BI, CA IAS 21 Currency Multibook, MRC,GL More Segments, etc. Flex / ChartFields SPECIFIC IFRS FEATURES Specific functionality developed for IFRS Asset Componentization Parent & Child Assets Child Depreciation rates differ Impairment Processing Impairment identification Unplanned depreciation Transaction Level Multiple Accounting Transaction Document And Data Accounting Primary Ledger Alternate Ledger Reporting Accounting Principle Change Ledger Set: Future GAAP / IFRS Ledger: Current GAAP Current Principle Expanded COA Calendar USD Ledger: What if new rules Differences Expanded COA Calendar USD 20

Asset Componentization A feature in today s offering: in use outside USA Comp -onent Name Useful Life 1 Airframe 25 2 Engines 5 3 Interior 10 4 Electronics 3 5 Total airplane 25 US GAAP today: One Airplane, one FA Pool Depreciation OK US GAAP with IAS 16 Condorsed into it: One Airplane, Five FA Pool Depreciation NOT OK 21

Asset Componentization A numeric example: a Building US GAAP IFRS Asset Elevator Roof Frame Land Parent Asset Building # 171 5,000,000 Components 500,000 250,000 2,000,000 2,250,000 5,000,000 Useful Life 25 years 5 years 10 years 25 years 50 years Mixed Simple Depreciation PY 200,000 100,000 25,000 80,000 45,000 250,000 No. of asset records 1 5 No. of deprn. methods 1 5 No. of reconciliations 0 1 No. of Historic rates 1 5 Feature: Parent-Child Assets; depreciation at different rates for each child 22

Condorsement & IAS 16 (The Fixed Asset IFRS standard) Condorsement, if announced FASB will publish IAS 16 as an ASU (Accounting Standard Update) You and everyone else in the US community will have an opportunity to comment on IAS 16 Favorable comments will mean it gets endorsed Unfavorable comments will mean the FASB tells the IASB it did not meet General Acceptance The issue will have to be examined, discussed, and GA will have to be renegotiated 23

Asset Impairment Common thinking in US GAAP & IFRS semantic convergence only required All assets that don t have a specified impairment model Cash Impairable AR Bad debt & similar reserves Inventory Lower of cost & market, inventory reserves Intangibles Impairable PP&E Impairable Financial Instruments Specific Impairment principles Subsidiaries Impairable Businesses Impairable 24

Asset Impairment Unforeseen loss of value in an asset If foreseen, you should have baked it into the useful life Based on future cash flows, so you need to figure the CGU, Cash Generating Unit But it is unforeseen, so you don t know the CGU until it happens Never applies to easy-to-sell assets a pick-up truck should never be impaired! Examples: say we own a Asset Reason for Impairment Relevant CGU Sugar Mill Nationalized in a country All/only businesses in that country Sugar Market Collapse All our Sugar Businesses Milling method outlawed by FDA Sugar business in the USA Nuclear Power Plant Chernobyl Disaster Power from all Chernobyl style plants Fukushima Disaster (Germany) Power from all German Nuclear plants Fukushima Disaster (USA) None 25

Asset Impairment FA Feature facilitates flagging, valuation I think (personal opinion) initial accounting work will be done in EPM, Consolidation products Similar to Discontinued Operations Might be actually incorporated separately to isolate and contain Pushed back to GL in company codes and cost centers And then to Fixed Assets 26

Delivering an Integrated Close 27 27

Hyperion Financial Management Features Enable Top End IFRS Reporting CORE CONSOLIDATION FEATURES Multiple reporting standards in a single solution GAAP IFRS Flexible Rules Engine Enables tracking of GAAP vs. IFRS adjustments CUSTOM DIMENSIONS Journal Entries and Audit Creates Electronic Binder of all adjustments DOCUMENT ATTACHMENTS Easy to reconcile and trend GAAP vs. IFRS results FLEXIBLE REPORTING 28

IFRS Compliance: Use your GRC Manage changes to policies and controls GRC DOCUMENTATION REPOSITORY Record changes to business process due to IFRS COMPLIANCE WORKFLOW Automate steps to audit IFRS compliance APPLICATION CONTROLS MONITORING Single subledger transaction creates multiple accounting representations Control changes to ERP applications COMPLIANCE DASHBOARDS Monitor status of testing and exceptions 29

We encourage you to use the newly minted corporate tagline Hardware and Software, Engineered to Work Together. at the end of all your presentations. This message should replace any reference to our previous corporate tagline Software. Hardware. Complete. 30